Personal finances are always a complicated matter. How much of my savings should I invest? This particular question always comes to mind. When you are starting to become an adult, managing finances can seem very difficult to manage. But with the passage of time when a person creates balance between their spending and income, the management process becomes easier with the passage of time. Three golden rules can ensure a person to stay financially ahead of everyone else;
1) Always have fewer expenses than your income.
2) Try to save more and spend less.
3) Find investments to secure your future finances.
To be able to invest some amount anywhere, the first and foremost requirement is to have some money saved up. Even though saving money can seem like a daunting task, it is not so difficult. With a little self-discipline and hard-work, money can be saved up in no time.
Savings is a cash amount which a person keeps aside to utilize in times of need. This amount which is kept aside does not have to be huge maybe a $100 or so. But eventually the savings amount can add up to a large sum. Some people do not like to keep cash instead they turn their cash into something solid such as a car. Others keep their savings in a checking or savings account.
Any form of cash or asset which can be immediately sold or used to get cash on an urgent basis is considered savings. Even the richest of investors have some amounts of savings or cash stored somewhere to go to in times of need.
Why should you have savings?
There are a few reasons to keep in mind when a person decides to save their money. It helps in building the mindset for the process of saving some money.
Cater to your emergency needs, whether it is a big emergency or a small one. There are times when a person has some medical emergency and has to pay a huge amount in hospital bills. It becomes difficult this kind of amounts to cut out from monthly expenses.
Some people love to travel. But it is not cheap to do so. This is why having a good amount of savings at hand can help a person to travel. Moreover, any other product such as a nice car, a bigger refrigerator, an upgrade in the house or any other product which puts a strain on the monthly income of a person.
Related: How Much to Budget for Food?
Role of Inflation in Savings
Keeping savings in your hand so that any emergency situation can be catered to is a good option. But keeping all of your money in the forms of savings for long terms can create a loss. This is because with the passage of time, there can be inflation on the amount. Generally, 2% inflation runs every year. This decreases the worth of cash which in turn reduces the purchasing power of consumers. Due to this and several other reasons, it is important to introduce the concept of investment for long term financial security.
Investments are an amount of money or capital which are used to buy an asset which has the potential to grow in the future and create a solid and increased rate of return with the passage of time. The purpose of investments is to make the money grow. An investor buys stocks, property, or any other similar asset which have the chance to increase in their value. Investments should be backed by some sort of assets to make them secure.
When to make investments?
Investments should be made wisely. It is important to have a safety cushion to turn to if financial support is needed at any point in time. But not everyone is ready to make an as soon as they have gathered up some amount. Investments need to be made when a person has enough amount to handle their emergency situations as well as buy any services or products when they are needed. Then they are ready to move to the next step. Investments create a safety net for future financial plans.
If all the requirements are being met and emergency situation cash is available, it is important to put the remaining amount in a place where it adds further value to the person’s wealth.
How investments work?
It is very easy to understand the concept of investments. Suppose a person has $100 and they make an investment in a place where they get 10% return on their $100. After a month or so, $100 now become $110. When the person places these $110 for investments, they get $11 every $110 dollars.
This seems like a very simple rule and makes it sound like an easy way to get rich. But unfortunately the return on the investment is not 10% every time. Sometimes, it can be less and other times it may have no return value at all.
How much savings should be invested?
This is the most critical part of discussion: how much to spend on investments. The importance of savings is immense but to have a financially secure future, investments must be made as well. Everyone must understand that not everyone has the same financial situation. This is why it is not possible to give one advice to everyone. But as a general rule, 15% to 25% of your total income can be invested (provided that you have good savings in place). But there are a few tips which can be followed while investing your savings.
1) Invest when there is enough amount available to handle cash situations.
2) Always have a back up to cover up any losses for investment.
3) Do not invest everything in one place.
4) Pick multiple assets when investing i.e. buy a stock from some of the amount and from the rest buy a real estate property.
Finances are sometimes tough to work through. Balancing between investments, savings, as well as daily expenses can be hard to juggle. They require a lot of consistency and motivation for saving or setting money aside for the purpose of investment. Whether you are looking to invest or save, it is important to have a clear goal in mind. By having goals in hand, a financial path can be drawn out. This article is not a professional financial opinion. It can vary. Its best to take final advice from a financial advisor and make a plan as per their suggestion.